442 SUPREME COURT REPORTS ANNOTATED

Castillo vs. Balinghasay

*
G.R. No. 150976. October 18, 2004.

CECILIA CASTILLO, OSCAR DEL ROSARIO, ARTURO

S. FLORES, XERXES NAVARRO, MARIA ANTONIA
TEMPLO and MEDICAL CENTER PARAÑAQUE, INC.,
petitioners, vs. ANGELES BALINGHASAY, RENATO
BERNABE, ALODIA DEL ROSARIO, ROMEO FUNTILA,
TERESITA GAYANILO, RUSTICO JIMENEZ, ARACELI**
JO, ESMERALDA MEDINA, CECILIA MONTALBAN,
VIRGILIO OBLEPIAS, CARMENCITA PARRENO,
CESAR REYES, REYNALDO SAVET, SERAPIO
TACCAD, VICENTE VALDEZ, SALVACION
VILLAMORA, and HUMBERTO VILLAREAL,
respondents.

Corporation Law; Corporation Code; Voting Rights; The right

to vote is a right inherent in and incidental to the ownership of
corporate stock, and as such is a property right.—One of the
rights of a stockholder is the right to participate in the control
and management of the corporation that is exercised through his
vote. The right to vote is a right inherent in and incidental to the
ownership of corporate stock, and as such is a property right. The
stockholder cannot be deprived of the right to vote his stock nor
may the right be essentially impaired, either by the legislature or
by the corporation, without his consent, through amending the
charter, or the by-laws.

_______________

* FIRST DIVISION.

** Sometimes “Arceli” in some parts of the records.

 443

VOL. 440, OCTOBER 18, 2004 443

Castillo vs. Balinghasay

Same; Same; Same; Retroactivity; Section 148 of the

Corporation Code expressly provides that it shall apply to
corporations in existence at the time of the effectivity of the Code.
—Section 148 of the Corporation Code expressly provides that it
shall apply to corporations in existence at the time of the
effectivity of the Code. Hence, the non-impairment clause is
inapplicable in this instance. When Article VII of the Articles of
Incorporation of MCPI were amended in 1992, the board of
directors and stockholders must have been aware of Section 6 of
the Corporation Code and intended that Article VII be construed
in harmony with the Code, which was then already in force and
effect. Since Section 6 of the Corporation Code expressly prohibits
the deprivation of voting rights, except as to “preferred” and
“redeemable” shares, then Article VII of the Articles of
Incorporation cannot be construed as granting exclusive voting
rights to Class “A” shareholders, to the prejudice of Class “B”
shareholders, without running afoul of the letter and spirit of the
Corporation Code.

PETITION for review on certiorari of a decision of the

Regional Trial Court of Parañaque City, Br. 258.

The facts are stated in the opinion of the Court.

     Gabriel T. Robeniol for petitioners.
          Marciano S. Bacalla, Jr. and Ruben C. Ladia for
respondents.

QUISUMBING, J.:
1
For review on certiorari is the Partial Judgment dated
November 26, 2001 in Civil Case No. 01-0140, of the
Regional Trial Court (RTC) of Parañaque City, Branch
258. The trial court declared the February 9, 2001, election
of the board of directors of the Medical Center Parañaque,
Inc. (MCPI) valid. The Partial Judgment dismissed
petitioners’ first cause of action, specifically, to annul said
election for depriving petitioners their voting rights and to
be voted on as members of the board.

_______________

1 Rollo, pp. 44-47. Penned by Hon. Judge Raul E. De Leon.

444

444 SUPREME COURT REPORTS ANNOTATED

Castillo vs. Balinghasay

The facts, as culled from records, are as follows:

Petitioners and the respondents are stockholders of
MCPI, with the former holding Class “B” shares and the
latter owning Class “A” shares.
MCPI is a domestic corporation with offices at Dr. A.
Santos Avenue, Sucat, Parañaque City. It was organized
sometime in September 1977. At the time of its
incorporation, Act No. 1459, the old Corporation Law was
still in force and effect. Article VII of MCPI’s original
Articles of Incorporation, as approved by the Securities
and Exchange Commission (SEC) on October 26, 1977,
reads as follows:

“SEVENTH. That the authorized capital stock of the corporation

is TWO MILLION (P2,000,000.00) PESOS, Philippine Currency,
divided into TWO THOUSAND (2,000) SHARES at a par value of
P100 each share, whereby the ONE THOUSAND SHARES
issued to, and subscribed by, the incorporating stockholders shall
be classified as Class A shares while the other ONE THOUSAND
unissued shares shall be considered as Class B shares. Only
holders of Class A shares can have the right to vote and the2
right to be elected as directors or as corporate officers.”
(Stress supplied)

On July 31, 1981, Article VII of the Articles of

Incorporation of MCPI was amended, to read thus:

“SEVENTH. That the authorized capital stock of the corporation

is FIVE MILLION (P5,000,000.00) PESOS, divided as follows:
CLASS NO. OF SHARES PAR VALUE
“A” 1,000 P1,000.00
“B” 4,000 P1,000.00

Only holders of Class A shares have the right to vote 3

and the
right to be elected as directors or as corporate officers.” (Emphasis
supplied)

_______________

2 Id., at pp. 128-129.

3 Id., at pp. 83-84.

445

VOL. 440, OCTOBER 18, 2004 445

Castillo vs. Balinghasay

The foregoing amendment was approved by the SEC on

June 7, 1983. While the amendment granted the right to
vote and to be elected as directors or corporate officers only
to holders of Class “A” shares, holders of Class “B” stocks
were granted the same rights and privileges as holders of
Class “A” stocks with respect to the payment of dividends.
On September 9, 1992, Article VII was again amended
to provide as follows:

“SEVENTH: That the authorized capital stock of the corporation

is THIRTY TWO MILLION PESOS (P32,000,000.00) divided as
follows:

CLASS NO. OF SHARES PAR VALUE

“A” 1,000 P1,000.00
“B” 31,000 1,000.00

Except when otherwise provided by law, only holders of

Class “A “ shares have the right to vote and 4
the right to be
elected as directors or as corporate officers” (Stress and Italics
supplied).

The SEC approved the foregoing amendment on

September 22, 1993.
 On February 9, 2001, the shareholders of MCPI held
their annual stockholders’ meeting and election for
directors. During the course of the proceedings, respondent
Rustico Jimenez, citing Article VII, as amended, and
notwithstanding MCPI’s history, declared over the
objections of herein petitioners, that no Class “B”
shareholder was qualified to run or be voted upon as a
director. In the past, MCPI had seen holders of Class “B”
shares voted for and serve as members of the corporate
board and some Class “B” share owners were in fact
nominated for election as board members. Nonetheless,
Jimenez went on to announce that the candidates holding

_______________

4 Id., at pp. 71-72.

446

446 SUPREME COURT REPORTS ANNOTATED

Castillo vs. Balinghasay

Class “A” shares were the winners of all seats in the

corporate board. The petitioners protested, claiming that
Article VII was null and void for depriving them, as Class
“B” shareholders, of their right to vote and to be voted
upon, in violation of the Corporation Code (Batas
Pambansa Blg. 68), as amended.
On March 22, 2001, after their protest was given short
shrift, herein petitioners filed a Complaint for Injunction,
Accounting and Damages, docketed as Civil Case No. CV-
01-0140 before the RTC of Parañaque City, Branch 258.
Said complaint was founded on two (2) principal causes of
action, namely:

“a. Annulment of the declaration of directors of the

MCPI made during the February 9, 2001 Annual
Stockholders’ Meeting, and for the conduct of an
election whereat all stockholders, irrespective of
the classification of the shares they hold, should be
afforded their right to vote and be voted for; and
 Stockholders’ derivative suit challenging the
“b. validity of a contract entered into by the Board of
Directors of MCPI 5
for the operation of the
ultrasound unit.”

Subsequently, the complaint was amended to implead

MCPI as party-plaintiff for purposes only of the second
cause of action.
Before the trial court, the herein petitioners alleged
that they were deprived of their right to vote and to be
voted on as directors at the annual stockholders’ meeting
held on February 9, 2001, because respondents had
erroneously relied on Article VII of the Articles of
Incorporation of MCPI, despite Article VII being contrary
to the Corporation Code, thus null and void. Additionally,
respondents were in estoppel, because in the past,
petitioners were allowed to vote and to be elected as
members of the board. They further claimed that the
privilege granted to the Class “A” shareholders was more
in the nature of a right granted to founder’s shares.

_______________

5 Id., at p. 377.

447

VOL. 440, OCTOBER 18, 2004 447

Castillo vs. Balinghasay

In their Answer, the respondents averred that the

provisions of Article VII clearly and categorically state
that only holders of Class “A” shares have the exclusive
right to vote and be elected as directors and officers of the
corporation. They denied that the exclusivity was intended
only as a privilege granted to founder’s shares, as no such
proviso is found in the Articles of Incorporation. The
respondents further claimed that the exclusivity of the
right granted to Class “A” holders cannot be defeated or
impaired by any subsequent legislative enactment, e.g. the
New Corporation Code, as the Articles of Incorporation is
an intra-corporate contract between the corporation and
its members; between the corporation and its stockholders;
and among the stockholders. They submit that to allow
Class “B” shareholders to vote and be elected as directors
would constitute a violation of MCPI’s franchise or charter
as granted by the State.
At the pre-trial, the trial court ruled that a partial
judgment could be rendered on the first cause of action and
required the parties to submit their respective position
papers or memoranda.
On November 26, 2001, the RTC rendered the Partial
Judgment, the dispositive portion of which reads:

“WHEREFORE, viewed in the light of the foregoing, the election

held on February 9, 2001 is VALID as the holders of CLASS “B”
shares are not entitled to vote and be voted for and this case
based on the First Cause
6
of Action is DISMISSED.
SO ORDERED.”

In finding for the respondents, the trial court ruled that

corporations had the power to classify their shares of
stocks, such as “voting 7
and non-voting” shares,
conformably with Section 6 of the Corporation Code of the
Philippines. It

_______________

6 Rollo, p. 47.
7 SEC. 6. Classification of shares.—The shares of stock of stock
corporations may be divided into classes or series of shares, or

448

448 SUPREME COURT REPORTS ANNOTATED

Castillo vs. Balinghasay

pointed out that Article VII of both the original and

amended Articles of Incorporation clearly provided that
only Class “A”

_______________
 both, any of which classes or series of shares may have such rights,
privileges or restrictions as may be stated in the articles of incorporation:
Provided, That no share may be deprived of voting rights except those
classified and issued as “preferred” or “redeemable” shares, unless
otherwise provided in this Code: Provided, further, That there shall
always be a class or series of shares which have complete voting rights.
Any or all of the shares or series of shares may have a par value or have
no par value as may be provided for in the articles of incorporation:
Provided, however, That banks, trust companies, insurance companies,
public utilities, and building and loan associations shall not be permitted
to issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given
preference in the distribution of the assets of the corporation in case of
liquidation and in the distribution of dividends, or such other preferences
as may be stated in the articles of incorporation which are not violative of
the provisions of this Code: Provided, That preferred shares of stock may
be issued only with a stated par value. The Board of Directors, where
authorized in the articles of incorporation, may fix the terms and
conditions of preferred shares of stock or any series thereof: Provided,
That such terms and conditions shall be effective upon filing of a
certificate thereof with the Securities and Exchange Commission.
Shares of capital stock issued without par value shall be deemed fully
paid and non-assessable and the holder of such shares shall not be liable
to the corporation or to its creditors in respect thereto: Provided, That
shares without par value may not be issued for a consideration less than
the value of five (P5.00) pesos per share: Provided, further, That the
entire consideration received by the corporation for its no-par value
shares shall be treated as capital and shall not be available for
distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of
insuring compliance with constitutional or legal requirements.
Except as otherwise provided by the articles of incorporation and
stated in the certificate of stock, each share shall be equal in all respects
to every other share.

449

VOL. 440, OCTOBER 18, 2004 449

Castillo vs. Balinghasay
shareholders could vote and be voted for to the exclusion of
Class “B” shareholders, the exception being in instances
provided by law, such as those enumerated in Section 6,
paragraph 6 of the Corporation Code. The RTC found
merit in the respondents’ theory that the Articles of
Incorporation, which defines the rights and limitations of
all its shareholders, is a contract between MCPI and its
shareholders. It is thus the law between the parties and
should be strictly enforced as to them. It brushed aside the
petitioners’ claim that the Class “A” shareholders were in
estoppel, as the election of Class “B” shareholders to the
corporate board may be deemed as a mere act of
benevolence on the part of the officers. Finally, the court
brushed aside the “founder’s shares” theory of the
petitioners for lack of factual basis.
Hence, this petition submitting the sole legal issue of
whether or not the Court a quo, in rendering the Partial

_______________

Where the articles of incorporation provide for non-voting shares in the

cases allowed by this Code, the holders of such shares shall nevertheless
be entitled to vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all
or substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another
corporation or other corporations;
7. Investment of corporate funds in another corporation or business
in accordance with this Code; and
8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote

necessary to approve a particular corporate act as provided in this Code
shall be deemed to refer only to stocks with voting rights.

450
450 SUPREME COURT REPORTS ANNOTATED
Castillo vs. Balinghasay

Judgment dated November 26, 2001, has decided a

question of substance in a way not in accord with law and
jurisprudence considering that:

“1. Under the Corporation Code, the exclusive voting

right and right to be voted granted by the Articles
of Incorporation of the MCPI to Class A
shareholders is null and void, or already
extinguished;
“2. Hence, the declaration of directors made during the
February 9, 2001 Annual Stockholders’ Meeting on
the basis of the purported exclusive voting rights is
null and void for having been done without the
benefit of an election and in violation of the rights
of plaintiffs and Class B shareholders; and
“3. Perforce, another election should be conducted to
elect the directors of the MCPI, this time affording
the holders of Class B8 shares full voting right and
the right to be voted.”

The issue for our resolution is whether or not holders of

Class “B” shares of the MCPI may be deprived of the right
to vote and be voted for as directors in MCPI.
Before us, petitioners assert that Article VII of the
Articles of Incorporation of MCPI, which denied them
voting rights, is null and void for being contrary to Section
6 of the Corporation Code. They point out that Section 6
prohibits the deprivation of voting rights except as to
preferred and redeemable shares only. Hence, under the
present law on corporations, all shareholders, regardless of
classification, other than holders of preferred or
redeemable shares, are entitled to vote and to be elected as
corporate directors or officers. Since the Class “B”
shareholders are not classified as holders of either
preferred or redeemable shares, then it necessarily follows
that they are entitled to vote and to be voted for as
directors or officers.
 The respondents, in turn, maintain that the grant of
exclusive voting rights to Class “A” shares is clearly
provided in the

_______________

8 Rollo, p. 23.

451

VOL. 440, OCTOBER 18, 2004 451

Castillo vs. Balinghasay

9
Articles of Incorporation and is in accord with Section 5 of
the Corporation Law (Act No. 1459), which was the
prevailing law when MCPI was incorporated in 1977. They
likewise submit that as the Articles of Incorporation of
MCPI is in the

_______________

9 SEC. 5. The shares of any corporation formed under this Act may be
divided into classes with such rights, voting powers, preferences, and
restrictions as may be provided for in the articles of incorporation. Any or
all of the shares may have a par value or have no par value, as provided
in the articles of incorporation: Provided, however, That banks, trust
companies, insurance companies, and building and loan associations shall
not be permitted to issue no-par value shares of stock. Subject to the laws
creating and defining the duties of the Public Service Commission, shares
of capital stock without par value may be issued from time to time, (a) for
such consideration as may be prescribed in the articles of incorporation;
or (b) in the absence of fraud in the transaction, for such consideration as,
from time to time, may be fixed by the board of directors pursuant to
authority conferred in the articles of incorporation; or (c) for such
consideration as shall be consented to or approved by the holders of a
majority of the shares entitled to vote at a meeting called in the manner
prescribed by the by-laws, provided the call for such meeting shall
contain notice of such purpose. Any or all shares so issued shall be
deemed fully paid and non-assessable and the holder of such shares shall
not be liable to the corporation or to its creditors in respect thereto:
Provided, however, That shares without par value may not be issued for a
consideration less than the value of five pesos per share. Except as
otherwise provided by the articles of incorporation, and stated in the
certificate of stock, each share shall be in all respects equal to every other
share.
Preferred shares of stock issued by any corporation the holders of
which are entitled to any preference in the distribution of the assets of
the corporation in case of liquidation, may be issued only with a stated
par value and, in all certificates for such shares of stock, the amount
which the holder of each of such preferred shares shall be entitled to
receive from the assets of the corporation in preference to holders of other
shares, shall be stated.
The entire consideration received by the corporation for its nopar value
shares shall be treated as capital, and shall not be available for
distribution as dividends.

452

452 SUPREME COURT REPORTS ANNOTATED

Castillo vs. Balinghasay

nature of a contract between the corporation and its

shareholders and Section 6 of the Corporation Code could
not retroactively apply
10
to it without violating the non-
impairment clause of the Constitution.
We find merit in the petition.
When Article VII of the Articles of Incorporation of
MCPI was amended in 1992, the phrase “except when
otherwise provided by law” was inserted in the provision
governing the grant of voting powers to Class “A”
shareholders. This particular amendment is relevant for it
speaks of a law providing for exceptions to the exclusive
grant of voting rights to Class “A” stockholders. Which law
was the amendment referring to? The determination of
which law to apply is necessary. There are two laws being
cited and relied upon by the parties in this case. In this
instance, the law in force at the time of the 1992
amendment was the Corporation Code (B.P. Blg. 68), not
the Corporation Law (Act No. 1459), which had been
repealed by then.
We find and so hold that the law referred to in the
amendment to Article VII refers to the Corporation Code
and no other law. At the time of the incorporation of MCPI
in 1977, the right of a corporation to classify its shares of
stock was sanctioned by Section 5 of Act No. 1459. The law
repealing Act No. 1459, B.P. Blg. 68, retained the same
grant of right of classification of stock shares to
corporations, but with a significant change. Under Section
6 of B.P. Blg. 68, the requirements and restrictions on
voting rights were explicitly provided for, such that “no
share may be deprived of voting rights except those
classified and issued as “preferred” or “redeemable” shares,
unless otherwise provided in this Code” and that “there
shall always be a class or series of shares which have

_______________

10 THE 1987 CONSTITUTION OF THE REPUBLIC OF THE

PHILIPPINES, ARTICLE III.
SEC. 10. No law impairing the obligation of contracts shall be passed.

453

VOL. 440, OCTOBER 18, 2004 453

Castillo vs. Balinghasay

complete voting rights.” Section 6 of the Corporation Code

being deemed written into Article VII of the Articles of
Incorporation of MCPI, it necessarily follows that unless
Class “B” shares of MCPI stocks are clearly categorized to
be “preferred” or “redeemable” shares, the holders of said
Class “B” shares may not be deprived of their voting
rights. Note that there is nothing in the Articles of
Incorporation nor an iota of evidence on record to show
that Class “B” shares were categorized as either
“preferred” or “redeemable” shares. The only possible
conclusion is that Class “B” shares fall under neither
category and thus, under the law, are allowed to exercise
voting rights.
One of the rights of a stockholder is the right to
participate in the control and management of the
corporation that is exercised through his vote. The right to
vote is a right inherent in and incidental to the ownership
of corporate stock, and as such is a property right. The
stockholder cannot be deprived of the right to vote his
stock nor may the right be essentially impaired, either by
the legislature or by the corporation, without11his consent,
through amending the charter, or the by-laws.
Neither do we find merit in respondents’ position that
Section 6 of the Corporation Code cannot apply to MCPI
without running afoul of the non-impairment
12
clause of the
Bill of Rights. Section 148 of the Corporation Code
expressly pro-

_______________

11 WILLIAM MEADE FLETCHER, 5 FLETCHER CYCLOPEDIA OF

THE LAW OF PRIVATE CORPORATIONS § 2025, 116 (Revised Volume
1976).
12 SEC. 148. Applicability to existing corporations.—All corporations
lawfully existing and doing business in the Philippines on the date of
the effectivity of this Code and heretofore authorized, licensed or
registered by the Securities and Exchange Commission, shall be deemed
to have been authorized, licensed or registered under the
provisions of this Code, subject to the terms and conditions of its
license, and shall be governed by the provisions hereof: Provided,
That where any such corporation is affected by the

454

454 SUPREME COURT REPORTS ANNOTATED

Castillo vs. Balinghasay

vides that it shall apply to corporations in existence at the

time of the effectivity of the Code. Hence, the non-
impairment clause is inapplicable in this instance. When
Article VII of the Articles of Incorporation of MCPI were
amended in 1992, the board of directors and stockholders
must have been aware of Section 6 of the Corporation Code
and intended that Article VII be construed in harmony
with the Code, which was then already in force and effect.
Since Section 6 of the Corporation Code expressly prohibits
the deprivation of voting rights, except as to “preferred”
and “redeemable” shares, then Article VII of the Articles of
Incorporation cannot be construed as granting exclusive
voting rights to Class “A” shareholders, to the prejudice of
Class “B” shareholders, without running afoul of the letter
and spirit of the Corporation Code.
The respondents then take the tack that the phrase
“except when otherwise provided by law” found in the
amended Articles is only a handwritten insertion and
could have been inserted by anybody and that no board
resolution was ever passed authorizing or approving said
amendment.
Said contention is not for this Court to pass upon,
involving as it does a factual question, which is not proper
in this petition. In an appeal
13
via certiorari, only questions
of law may be reviewed. Besides, respondents did not
adduce persuasive evidence, but only bare allegations, to
support their suspicion. The presumption that in the
amendment process,
14
the ordinary course of business has
been followed
15
and that official duty has been regularly
performed on the part of the SEC, applies in this case.

_______________

new requirements of this Code, said corporation shall, unless

otherwise herein provided, be given a period of not more than two (2)
years from the effectivity of this Code within which to comply with the
same. (Emphasis supplied)
13 Bangko Sentral ng Pilipinas v. Santamaria, G.R. No. 139885, 13
January 2003, 395 SCRA 84, 92.
14 See Revised Rules of Court, Rule 131, Section 3(q).
15 Id., at Section 3(m).

455

VOL. 440, OCTOBER 18, 2004 455

Briones vs. Miguel

WHEREFORE, the petition is GRANTED. The Partial

Judgment dated November 26, 2001 of the Regional Trial
Court of Parañaque City, Branch 258, in Civil Case No. 01-
0140 is REVERSED AND SET ASIDE. No pronouncement
as to costs.
 SO ORDERED.

     Davide Jr. (C.J., Chairman), Ynares-Santiago and

Car-pio, JJ., concur.
     Azcuna, J., On Leave.

Petition granted, partial judgment reversed and set

aside.

Note.—A minority stockholder and member of the

board of directors has no power or authority to sue on
behalf of the corporation. (Tam Wing Tak vs. Makasiar,
350 SCRA 475 [2001])

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